Department of Health
and Human Services

Office of Inspector General -- AUDIT

August 22, 1997

Complete
Text of Report is available in PDF format (1M). Copies can also be obtained by contacting the Office of Public Affairs
at 202-619-1343.

EXECUTIVE SUMMARY:

This report presents the consolidated results of our audits of Medicaid payments for outpatient clinical laboratory services
in eight States. The audit is being conducted as a joint Federal/State project under the Office of Inspector General's
(OIG) Partnership Plan. Staff from State auditor's offices and the OIG, Office of Audit Services (OAS) are continuing audit
effort in an additional three States.

The objective of the nationwide audit is to determine the adequacy of State agency procedures and controls over the payment
of Medicaid laboratory claims. Specifically, the audit is designed to determine whether Medicaid payments for chemistry,
hematology, and urinalysis tests exceeded amounts recognized by Medicare for the same tests or were duplicated. In doing
so, we identified tests that were not grouped together (bundled into a panel or profile), for payment purposes. Proper
grouping of tests helps to ensure that Medicaid agencies do not reimburse medical providers more for clinical laboratory
tests than amounts that Medicare recognizes for the same services, as required by applicable laws and guidance.

Our audit of Medicaid claims for outpatient clinical laboratory services in eight States disclosed that the Medicaid State
agencies did not have adequate controls to detect and prevent inappropriate payments for laboratory tests. Contrary to
applicable laws and guidance, the Medicaid State agencies paid medical providers more for clinical laboratory tests performed
in a physician's office, by an independent laboratory, or by a hospital laboratory for its outpatients than the amounts
Medicare recognizes for the same services. The inappropriate payments included potential overpayments for hematology profiles
and indices that were duplicated or may have been medically unnecessary. As a result, we estimate that the eight State
agencies potentially overpaid laboratory providers by about $6.5 million (Federal share $3.7 million) for chemistry, hematology,
and urinalysis tests during our audit period. Further, we estimate that $3.2 million (Federal share $1.9 million) in additional
annual savings is available if the eight State agencies implement our audit recommendations and providers continue to bill
for clinical laboratory tests using the same methodology employed during our audit period.

Our analysis of potential overpayments in 23 States that participated in the Health Care Financing Administration's (HCFA)
Medicaid Statistical Information System (MSIS) disclosed that the overwhelming majority of the identified overpayments
were associated with a comparatively small number of laboratory providers. Our review showed that less than 25 percent
of the laboratories with identified overpayments submitted 95 percent of the claims with potential overpayments. As a result,
Medicaid State agencies may be able to recover a substantial portion of past overpayments by concentrating on those laboratories
with the highest number of potential overpayments.

Individual reports were issued to each of the State agencies. The reports generally recommended that the State agencies:
(1) install system edits and controls to detect and prevent the types of errors disclosed in our audit, (2) recover the
Medicaid overpayments for clinical laboratory services identified in our audit, and (3) reimburse the Federal Government
for its share of any recoveries made by the State agency. In response to our individual reports, two States agreed with
reported findings and recommendations, four States partially agreed, while two States did not agree.

In our roll-up report on the first 14 States completed under our nationwide audit (A-01-95-00003), we recommended that
HCFA: (1) reemphasize the Medicaid requirement that State agency payments for outpatient clinical laboratory services not
exceed the amounts recognized by Medicare for the same services, (2) consider having State agencies update their provider
billing instructions to reflect Medicare bundling procedures, and (3) follow-up on the estimated $27.4 million ($15.7 million
Federal share) in potential overpayments identified in the 14 audits to ensure that the State agencies have implemented
needed edits, initiated recovery actions, and credited the Federal Government for its share of any recoveries.

In its written comments on our initial roll-up report, HCFA fully concurred with our first and third recommendations and
partially concurred with our second recommendation. Regarding our second recommendation, HCFA indicated that it planned
to advise Medicaid State agencies that they should consider using the Medicare bundling procedures for the chemistry, hematology,
and urinalysis tests examined in the OIG audit. However, HCFA will not tell the State agencies that they must use Medicare
bundling procedures for other types of laboratory tests or medical services as long as they stay within the Medicare upper
limit for payments and are consistent with the principles of efficiency, economy, and quality of care.

On January 15, 1997, HCFA issued a State Medicaid Director letter clarifying Medicaid policy with respect to the bundling
of laboratory tests and the upper limit of payments for such tests. Based on HCFA'S acceptance of our previous recommendations
and issuance of the State Medicaid Director letter, we have limited the recommendations in this roll-up report to the issues
specifically affecting the eight State agencies reported on in this report.

In its written comments on our draft roll-up report, HCFA concurred with our findings and recommendations.